ECON 110 MIDTERM QUESTIONS AND
CORRECT ANSWERS
Law of demand ✅✅CORRECT ANSW-When the price of a product falls, consumers demand larger
quantities of it
Law of supply ✅✅CORRECT ANSW-When the price of a product rises, firms offer more of it for
sale
Equilibrium ✅✅CORRECT ANSW-The price-quantity pair at which both buyers and sellers are
satisfied
Inferior good ✅✅CORRECT ANSW-A good whose quantity demanded falls with income
Normal good ✅✅CORRECT ANSW-A good whose quantity demanded rises with income
Substitutes ✅✅CORRECT ANSW-An increase in the price of one will tend to increase the demand
of the other
Cross-price elasticity>0
Opportunity cost ✅✅CORRECT ANSW-The value of all that must be sacrificed to do an activity or
make a purchase
Sunk costs ✅✅CORRECT ANSW-Costs incurred in the past and that rationally should not affect
future choices
Invisible hand ✅✅CORRECT ANSW-Individuals pursuing economic self-interest actually benefit
society
Marginal analysis ✅✅CORRECT ANSW-The study of the costs and benefits of an incremental
increase of an activity
Complements ✅✅CORRECT ANSW-An increase in the price of one good decreases demand for the
other
, Cross-price elasticity<0
Cardinal utility ✅✅CORRECT ANSW-The assumption that the satisfaction provided by any bundle
can be assigned a numerical value by a utility function of the form U=U(X,Y).
Ordinal utility ✅✅CORRECT ANSW-The assumption that people are able to rank each possible
bundle in order of preference
Completeness ✅✅CORRECT ANSW-Two bundles can always be ranked against each other as
more, less, or equally preferred
Transitivity ✅✅CORRECT ANSW-Whenever A is preferred to B and B is preferred to C, A is
preferred to C
Marginal rate of substitution ✅✅CORRECT ANSW-The slope of the indifference curve, the ratio of
the marginal utilities of the two goods
Corner solution ✅✅CORRECT ANSW-In a choice between two goods, a case in which the
consumer does not consume one of the goods
Engel curve ✅✅CORRECT ANSW-A curve relating the quantity of a good consumed to income
Income effect ✅✅CORRECT ANSW-The effect of a price change that results from the change in
real purchasing power
Substitution effect ✅✅CORRECT ANSW-The effect of a price change that results from the
associated change in the relative attractiveness of the goods
Own price elasticity ✅✅CORRECT ANSW-The percentage change in the quantity demanded that
results from a 1 percent change in price
E=(1/(dq/dp) x p/q)= ((delta q)/q)/(delta p)/p)
Unitary elasticity ✅✅CORRECT ANSW-A situation in which total revenue remains the same when
prices change
CORRECT ANSWERS
Law of demand ✅✅CORRECT ANSW-When the price of a product falls, consumers demand larger
quantities of it
Law of supply ✅✅CORRECT ANSW-When the price of a product rises, firms offer more of it for
sale
Equilibrium ✅✅CORRECT ANSW-The price-quantity pair at which both buyers and sellers are
satisfied
Inferior good ✅✅CORRECT ANSW-A good whose quantity demanded falls with income
Normal good ✅✅CORRECT ANSW-A good whose quantity demanded rises with income
Substitutes ✅✅CORRECT ANSW-An increase in the price of one will tend to increase the demand
of the other
Cross-price elasticity>0
Opportunity cost ✅✅CORRECT ANSW-The value of all that must be sacrificed to do an activity or
make a purchase
Sunk costs ✅✅CORRECT ANSW-Costs incurred in the past and that rationally should not affect
future choices
Invisible hand ✅✅CORRECT ANSW-Individuals pursuing economic self-interest actually benefit
society
Marginal analysis ✅✅CORRECT ANSW-The study of the costs and benefits of an incremental
increase of an activity
Complements ✅✅CORRECT ANSW-An increase in the price of one good decreases demand for the
other
, Cross-price elasticity<0
Cardinal utility ✅✅CORRECT ANSW-The assumption that the satisfaction provided by any bundle
can be assigned a numerical value by a utility function of the form U=U(X,Y).
Ordinal utility ✅✅CORRECT ANSW-The assumption that people are able to rank each possible
bundle in order of preference
Completeness ✅✅CORRECT ANSW-Two bundles can always be ranked against each other as
more, less, or equally preferred
Transitivity ✅✅CORRECT ANSW-Whenever A is preferred to B and B is preferred to C, A is
preferred to C
Marginal rate of substitution ✅✅CORRECT ANSW-The slope of the indifference curve, the ratio of
the marginal utilities of the two goods
Corner solution ✅✅CORRECT ANSW-In a choice between two goods, a case in which the
consumer does not consume one of the goods
Engel curve ✅✅CORRECT ANSW-A curve relating the quantity of a good consumed to income
Income effect ✅✅CORRECT ANSW-The effect of a price change that results from the change in
real purchasing power
Substitution effect ✅✅CORRECT ANSW-The effect of a price change that results from the
associated change in the relative attractiveness of the goods
Own price elasticity ✅✅CORRECT ANSW-The percentage change in the quantity demanded that
results from a 1 percent change in price
E=(1/(dq/dp) x p/q)= ((delta q)/q)/(delta p)/p)
Unitary elasticity ✅✅CORRECT ANSW-A situation in which total revenue remains the same when
prices change
